Report and Review of Financial Management Policies and Practices

1. Report and Review of Financial Management Policies and Practices February 5, 2013

2. “In looking at cities across the nation that have reputations for being well-managed financially … the one thing they have in common are clearly articulated fiscal policies” – Institute for Local Government • Review of Best Practices for Fiscal Policies – Coronado has a full inventory of written fiscal policies that are followed • Reviewed 46 financial practices areas – identified 17 for further consideration

3. Financial practices have been organized into five overlapping categories: • Budget and Budget Preparation • Cash Management Practices and Investment Policy • Financial Reporting • Long-term Financial Planning and Asset Management • Capital Improvement Program • Threats from the State of California have caused management to explore financial practices that will strengthen the City’s financial position and, at the same time, reduce the threat of a raid on local revenue

4. Recommendations • Pay Miscellaneous Plan unfunded retirement liabilities • Fund Other Post-Employment Benefits (OPEB) liabilities • Increase liability reserve • Establish Capital Improvement Program funding levels

5. Recommendations • Update the Facilities Management and Replacement Program including infrastructure assets • Update the minimum General Fund Reserve • Adopt policy to rotate auditors • Create and update financial policies as needed

6. Budget and Budget Preparation A12. Question: Is the City in compliance with its Reserve policy as it pertains to other funds (liability insurance, workers’ compensation and vehicle replacement)? Answer: The City is in compliance with its reserve requirements for workers’ compensation and vehicle replacement. The reserves for liability insurance need to be increased as a result of the increase to the self-insured retention limit. (Recommendation (2)d.)

7. Cash Management Practices and Investment Policy B2. Question: Does the City practice separation of duties; for example, accounts payable is separated from purchasing? Answer: Yes. The City’s auditors review and test separation of duties in various areas annually. The auditors have reported no material weaknesses in the City’s financial practices related to segregation of duties or other internal controls. The City should consider preparing a written policy to document duty separation requirements (Recommendation (2)i.) 

8. Cash Management Practices and Investment Policy B8. Question: Does the City have a method to actively review contracts for expiration, cost escalators and/or automatic renewals? Answer: Yes. Departments annually provide updated contract information to the City Manager’s office. The process will be redesigned to increase centralization of common services (e.g., copiers), and to highlight automatic renewals and cost escalators. This approach will create more efficiencies and increase management’s confidence that services are bid out. (Recommendation (2)i.)

9. Cash Management Practices and Investment Policy B9. Question: Is there a written Change Order Policy? Answer: Yes. This policy was last reviewed in 2010. Staff is currently working to update this policy (Recommendation (2)i).

10. Financial Reporting C4. Question: Is there a written policy to rotate the auditors? Answer: No. Best practices suggest that the auditor should be changed from time to time but there is no standard for the frequency of rotation. The length of time an auditor is engaged can range from five to ten years. The City should consider having a formal written policy. (Recommendation (2)a.)

11. Long-Term Financial Planning and Asset Management D1. Question: Does the City prepare and present long-term financial forecasts? Answer: Yes. Annually, staff prepares and presents a five-to-seven-year financial forecast of its General Fund and other significant funds. A written policy stating the requirement of this annual forecast should be developed. (Recommendation (2)i.) D2. Question: Is there a long-term Capital Improvement Program (CIP)? Answer: The City has a history of preparing a multi-year CIP. However, a multi-year plan was not developed for FY 2012-13 after the dissolution of the CDA. A multi-year plan beginning with the FY 2013-14 budget year will be prepared once further direction from the City Council on funding targets is received. (Recommendation (2)g.)

12. Long-Term Financial Planning and Asset Management D3. Question: Does the City have an unfunded pension liability? Answer: Yes. The liability is determined annually by staff of the California Public Employees’ Retirement System (CalPERS). In February 2011, the City Council considered a report prepared by Bartel Associates about the City’s options with regard to various unfunded pension liabilities. As a result, the Council took action to partially reduce the unfunded liability related to the Safety Plan Contract but deferred action related to the Miscellaneous Contract. (Recommendation (2)b.)

13. Long-Term Financial Planning and Asset Management D4. Question: Does the City have a liability for Other Post-Employment Benefits (OPEB)? Answer: Yes. It is calculated bi-annually by a certified actuary. The City pays the required contributions for the small number of retirees that utilize the City-funded benefit. The City should consider providing funding for the liability associated with future benefits. (Recommendation (2)c.)   D4 Note: The City of Coronado provides a contribution towards retiree health benefits, which are provided through the CalPERS Health Program. The actuarially accrued liability for providing this benefit is calculated bi-annually and reported in the City’s annual financial report.

14. Long-Term Financial Planning and Asset Management D5. Question: Does the City have a Facilities Management and Replacement Program? Answer: Yes. This program was last reviewed in November 2011. The program should be updated for the purpose of making it more robust and validate asset inventory assumptions. (Recommendation (2)e.)

15. Long-Term Financial Planning and Asset Management D6. Question: Does the City have a vehicle replacement program? Answer: Yes. Funding levels should be updated to address inflated costs to replace vehicles and equipment. (Recommendation (2)f.) D7. Question: Does the Reserve policy address funding for liability and workers’ compensation claims? Answer: Yes. The City needs to increase its liability reserves as a result of the increase to the self-insured retention limit. (Recommendation (2)d.).

16. Long-Term Financial Planning and Asset Management D8. Question: Are the City’s Enterprise Funds (wastewater, storm drain and golf funds) self-supporting? Answer: The Wastewater and Golf Funds operate without a subsidy from the General Fund. However, both funds have long-term capital needs for vital infrastructure replacement that will require longer term financial strategies. The General Fund currently subsidizes the Storm Drain Fund because the Storm Drain fee is only sufficient to cover a portion of the annual cost. The subsidy is made as a loan in anticipation that when the current Storm Drain bonds are paid off in 2026 there will be funds available to begin repayment. However, because of the continued cost growth associated with storm water management, it is unlikely that the current storm drain fee will be sufficient to repay the General Fund loans. The City Council should consider developing a long-term strategy for paying the costs of storm water management as well as system replacement costs. (Recommendation (2)i.)

17. Capital Improvement Program E1. Question: Has the City established a policy to calculate the resources to fund Capital Improvements? Answer: No (Recommendation (2)g.) E2. Question: Is there a plan for funding Capital Improvement Projects following the dissolution of redevelopment? Answer: Redevelopment and tax-increment financing has provided funding for most of the public facilities over the last 20 years. With dissolution of redevelopment, the CIP program should be reviewed with a defined funding level by policy to allow for longer term financial forecasting. (Recommendation (2)g).

18. Capital Improvement Program E3. Question: Has a review been conducted to establish the long-term capital needs of the Enterprise Funds? Answer: Long-term capital needs have been identified for the Golf Course. The needs of the Wastewater and Storm Drain funds are a departmental objective of Public Services. (Recommendation (2)e.) E4. Question: Is there a written policy and established system to rate and evaluate the remaining life of the City’s enterprise infrastructure assets? Answer: No. The City should consider developing a policy that addresses infrastructure evaluation, replacement and funding strategies. (Recommendation (2)g.)

19. QUESTIONS?